E19-1 (One Temporary Difference, Future Taxable Amounts, One Rate, No Beginning Deferred
Taxes) South Carolina Corporation has one temporary difference at the end of 2014 that will reverse and cause taxable amounts of $55,000 in 2015, $60,000 in 2016, and $65,000 in 2017. South Carolina’s pretax financial income for 2014 is $300,000, and the tax rate is 30% for all years. There are no deferred taxes at the beginning of 2014.
Instructions
(a) Compute taxable income and income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
E19-2 (Two Differences, No Beginning Deferred Taxes, Tracked through 2 Years) The following information is available for Wenger Corporation for 2013 (its first year of operations).
1. Excess of tax depreciation over book depreciation, $40,000. This $40,000 difference will reverse
equally over the years 2014–2017.
2. Deferral, for book purposes, of $20,000 of rent received in advance. The rent will be recognized in
2014.
3. Pretax financial income, $300,000.
4. Tax rate for all years, 40%.
Instructions
(a) Compute taxable income for 2013.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2013.
(c) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes
payable for 2014, assuming taxable income of $325,000.
E19-3 (One Temporary Difference, Future Taxable Amounts, One Rate, Beginning Deferred Taxes)
Bandung Corporation began 2014 with a $92,000 balance in the Deferred Tax Liability account. At the end of 2014, the related cumulative temporary difference amounts to $350,000, and it will reverse evenly over the next 2 years. Pretax accounting income for 2014 is $525,000, the tax rate for all years is 40%, and taxable income for 2014 is $405,000.
Instructions
(a) Compute income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014 beginning with the line
“Income before income taxes.”
E19-4 (Three Differences, Compute Taxable Income, Entry for Taxes) Zurich Company reports pretax
financial income of $70,000 for 2014. The following items cause taxable income to be different than pretax financial income.
1. Depreciation on the tax return is greater than depreciation on the income statement by $16,000.
2. Rent collected on the tax return is greater than rent recognized on the income statement by $22,000.
3. Fines for pollution appear as an expense of $11,000 on the income statement.
Zurich’s tax rate is 30% for all years, and the company expects to report taxable income in all future years. There are no deferred taxes at the beginning of 2014.
Instructions
(a) Compute taxable income and income taxes payable for 2014.
(b) Prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014.
(c) Prepare the income tax expense section of the income statement for 2014, beginning with the line “Income before income taxes.”
(d) Compute the effective income tax rate for 2014.
E19-6 (Identify Temporary or Permanent Differences) Listed below are items that are commonly ac-
counted for differently for financial reporting purposes than they are for tax purposes.
Instructions
For each item below, indicate whether it involves:
(1) A temporary difference that will result in future deductible amounts and, therefore, will usually
give rise to a deferred income tax asset.
(2) A temporary difference that will result in future taxable amounts and, therefore, will usually give
rise to a deferred income tax liability.
(3) A permanent difference.
Use the appropriate number to indicate your answer for each.
(a) ______ The MACRS depreciation system is used for tax purposes, and the straight-line depreciation
method is used for financial reporting purposes for some plant assets.
(b) ______ A landlord collects some rents in advance. Rents received are taxable in the period when
they are received.
(c) ______ Expenses are incurred in obtaining tax-exempt income.
(d) ______ Costs of guarantees and warranties are estimated and accrued for financial reporting purposes.
(e) ______ Installment sales of investments are accounted for by the accrual method for financial
reporting purposes and the installment method for tax purposes.
(f) ______ For some assets, straight-line depreciation is used for both financial reporting purposes and tax purposes but the assets’ lives are shorter for tax purposes.
(g) ______ Interest is received on an investment in tax-exempt municipal obligations.
(h) ______ Proceeds are received from a life insurance company because of the death of a key officer.
(The company carries a policy on key officers.)
(i) ______ The tax return reports a deduction for 80% of the dividends received from U.S. corporations.
The cost method is used in accounting for the related investments for financial reporting purposes.
(j) ______ Estimated losses on pending lawsuits and claims are accrued for books. These losses are tax deductible in the period(s) when the related liabilities are settled.
(k) ______ Expenses on stock options are accrued for financial reporting purposes.
E19-7 (Terminology, Relationships, Computations, Entries)
Instructions
Complete the following statements by filling in the blanks.
(a) In a period in which a taxable temporary difference reverses, the reversal will cause taxable income to be _______ (less than, greater than) pretax financial income.
(b) If a $76,000 balance in Deferred Tax Asset was computed by use of a 40% rate, the underlying cumulative temporary difference amounts to $_______.
(c) Deferred taxes ________ (are, are not) recorded to account for permanent differences.
(d) If a taxable temporary difference originates in 2014, it will cause taxable income for 2014 to be________ (less than, greater than) pretax financial income for 2014.
(e) If total tax expense is $50,000 and deferred tax expense is $65,000, then the current portion of the expense computation is referred to as current tax _______ (expense, benefit) of $_______.
(f) If a corporation’s tax return shows taxable income of $100,000 for Year 2 and a tax rate of 40%, how much will appear on the December 31, Year 2, balance sheet for “Income taxes payable” if the company has made estimated tax payments of $36,500 for Year 2? $________.
(g) An increase in the Deferred Tax Liability account on the balance sheet is recorded by a _______
(debit, credit) to the Income Tax Expense account.
(h) An income statement that reports current tax expense of $82,000 and deferred tax benefit of $23,000 will report total income tax expense of $________.
(i) A valuation account is needed whenever it is judged to be _______ that a portion of a deferred tax asset _______ (will be, will not be) realized.
(j) If the tax return shows total taxes due for the period of $75,000 but the income statement shows total income tax expense of $55,000, the difference of $20,000 is referred to as deferred tax _______(expense, benefit).
E19-8 (Two Temporary Differences, One Rate, 3 Years) Button Company has the following two temporary differences between its income tax expense and income taxes payable.
The income tax rate for all years is 40%.
Pretax Financial income 840,000 910,000 945,000
Excess depreciation (30,000) (40,000) (10,000)
Excess warranty expense 20,000 10,000 8,000
Total 830,000 880,000 943,000
Instructions
(a) Assuming there were no temporary differences prior to 2014, prepare the journal entry to record income tax expense, deferred income taxes, and income taxes payable for 2014, 2015, and 2016.
(b) Indicate how deferred taxes will be reported on the 2016 balance sheet. Button’s product warranty is for 12 months.
(c) Prepare the income tax expense section of the income statement for 2016, beginning with the line “Pretax financial income.”
E19-9 (Carryback and Carryforward of NOL, No Valuation Account, No Temporary Differences) The pretax financial income (or loss) figures for Jenny Spangler Company are as follows.
2009 $160,000
2010 250,000
2011 80,000
2012 (160,000)
2013 (380,000)
2014 120,000
2015 100,000
Pretax financial income (or loss) and taxable income (loss) were the same for all years involved. Assume a 45% tax rate for 2009 and 2010 and a 40% tax rate for the remaining years.
Instructions
Prepare the journal entries for the years 2011 to 2015 to record income tax expense and the effects of the net operating loss carrybacks and carryforwards assuming Jenny Spangler Company uses the carryback provision. All income and losses relate to normal operations. (In recording the benefits of a loss carryforward, assume that no valuation account is deemed necessary.)
E19-14 (Deferred Tax Asset with and without Valuation Account) Jennifer Capriati Corp. has a deferred tax asset account with a balance of $150,000 at the end of 2013 due to a single cumulative temporary difference of $375,000. At the end of 2014, this same temporary difference has increased to a cumulative amount of $450,000. Taxable income for 2014 is $820,000. The tax rate is 40% for all years. No valuation account related to the deferred tax asset is in existence at the end of 2013.
Instructions
(a) Record income tax expense, deferred income taxes, and income taxes payable for 2014, assuming that it is more likely than not that the deferred tax asset will be realized.
(b) Assuming that it is more likely than not that $30,000 of the deferred tax asset will not be realized, prepare the journal entry at the end of 2014 to record the valuation account.